Ailing Auto Industry Only Getting Worse

By fwhite

June 19, 2006

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While not exactly surprising, more news and research has surfaced that indicates the auto industry is not showing signs of financial improvement. Even though the outlook as recently as March indicated that bankruptcy for some automakers wasn't a likely scenario, it looks like new research is indicating the opposite.

While not exactly surprising, more news and research has surfaced that indicates the auto industry is not showing signs of financial improvement. As recently as March, financial analysts were predicting that the likelihood of bankruptcy for big auto manufacturers like GM wasn't a likely scenario, according to this CNN report, but the automaker's credit could be downgraded even further below "junk" status. Analysts also say that ailing automakers need to make significant progress with their turnaround plans in the next 18 months, before they engage in contract negotiations with the United Auto Workers (UAW) in Fall 2007; not an easy task when you consider the following, taken from CNN:

U.S. automakers are losing billions on their core automotive operations as they are hit by rising health-care costs for both active and retired employees. At the same time, they are steadily losing market share to foreign competitors.

So even though the outlook in March indicated that bankruptcy in March for some automakers wasn't a likely scenario, it looks like new research is indicating the opposite. By way of Manufacturing.net, an article titled "Bankruptcy Concerns For Auto Suppliers Continue To Increase According to New Study" points out the ugly facts produced from a study by AlixPartners, which found that 38 percent of all auto suppliers in North America are in fiscal danger of insolvency within 24 months unless they take extreme measures. Not only relegated to North America, the study says that globally, 24 percent of suppliers face the same fate.

The study involved 104 automotive suppliers, 22 automakers, 18 heavy-vehicle producers and 32 automotive conglomerates worldwide, and measured and compared them across a wide range of financial and operating metrics.

Other key findings from the study include the following:

 The Chinese automotive market has cooled off to such a degree that a big shake-up is most likely brewing;

 North American suppliers are trailing behind Asia and Europe in investment in research and development (R&D) spending, a critical element in developing innovative products for future returns; and

 Aggregate working capital efficiency for suppliers worldwide has not changed markedly since 1995.

There are signs, however, that the auto industry is trying like mad to turn things around  and still failing. This time it has nothing to do with laying off multiple thousands of hard-working people. Well mostly nothing.

The Star Ledger has hit upon the trend that many automakers will cease to manufacture models that aren't selling well, don't fit with company strategy or don't comply with new regulations. The Honda Insight for instance, is on its way to the junkyard, which appears to be a surprising move on the surface, especially in these days of "oil addiction." The Insight boasts 66 mpg, but Honda seems eager to stop production on the odd-looking innovator, which never really took off with consumers.

"In the eyes of consumers, design flaws can have as much of an impact on their perceptions of quality as can a defect," said Joe Ivers, executive director of quality and customer satisfaction research for J.D. Power and Associates, regarding J.D. Power and Associates' latest Initial Quality Survey, which was announced this month. "Yet many manufacturers have tended to address quality solely on the plant floor without considering design factors."

until now, it seems.

The company plans to push the Civic Hybrid instead, which is roomier and more popular. Ford and Porsche are also putting the kibosh on a few models. Pardon the clichés herewith, but only time will tell if this strategy will help turn the tide for the ailing auto industry.

Interestingly, a Harbour Consulting study released this month shows the two most efficient auto assembly plants in North America are a Ford plant in Atlanta and a General Motors plant in Ontario  and both of them are going to close. The Ford Atlanta plant slated for closure this year takes fewest hours to build car; No. 2 in rankings is the GM plant slated for closure in '08.